US Navy and military contractor caught in overbilling scheme

In June 2011, the Navy awarded Leonard Glenn Francis, a wealthy Malaysian contractor, $200 million in contracts, giving him control over providing supplies and dockside services for its fleet across the Pacific. http://www.nytimes.com/2013/11/21/us/navy-was-warned-of-contractor-in-bribery-scandal.html?hp
Francis is at the center of a widening investigation into an overbilling scheme in which federal prosecutors say he used cash, prostitutes and gifts to bribe Navy officials to help him defraud the service out of tens of millions of dollars. Two Navy commanders and a naval investigative agent have been charged with accepting bribes, while two admirals and a captain are also under investigation. Officials say they expect more service members to be implicated.
Interviews with American officials and documents obtained by The New York Times provide the first detailed look at how Mr. Francis and his company, Glenn Defense Marine Asia, lowballed rivals to win contracts as the first step in the overcharging scheme. The company submitted winning bids that experts say seemed so low that the Navy should have questioned whether they were realistic. Once it had locked up contracts, investigators say, the company — with the assistance of Navy officers — began pumping out fake invoices to inflate its billings.
Though Glenn Marine’s low bids might have seemed enticing, military contracting experts who reviewed those bids for The Times said the Navy should have been wary, and certainly more watchful, of Mr. Francis, particularly given the numerous warnings raised about his business practices over the years.
“The Navy watchdogs were sleeping while a burglar walked out with everything in the house,” said Charles Tiefer, a former member of the federal Commission on Wartime Contracting in Iraq and Afghanistan and a professor at the University of Baltimore School of Law.
The Navy’s criminal investigators now say they are examining how Mr. Francis won those contracts. The Navy secretary, Ray Mabus, has also ordered a review of similar supply contracts in other parts of the world, officials said. The Navy has canceled all of its contracts with Mr. Francis’ company and suspended it from future bidding.
“We hold our officers to very high standards of ethics and conduct when it comes to dealing with outside contractors, and the standards are very clear and are written down,” said Rear Adm. John F. Kirby, the Navy’s top spokesman. “What we are seeing as this case unfolds is that there are allegations about officers who appear to have failed to meet that standard.”
Admiral Kirby said that although the inquiry has widened, the Navy does not believe the problems with Glenn Marine reveal chronic shortcomings in its monitoring of contractors. “We are taking this very seriously,” he said, “but we also don’t think it bespeaks a systematic problem within the Navy writ large.”
Others are not so sure. Senator Claire McCaskill, a Democrat from Missouri who is chairwoman of a Senate subcommittee on contracting oversight, has asked for a briefing from Mr. Mabus, saying the Navy’s longtime ties to Mr. Francis were “extremely troubling.”
Even many retired Navy officers say they have been shocked by how chummy some of the officers charged in the case had become with Mr. Francis, calling him Big Bro and Boss in emails and promising to “work your business plan” within the Navy bureaucracy.
“This kind of malfeasance in basically working for someone else is kind of unheard-of among line officers, except in cases where someone was spying for a foreign power,” said Kevin Eyer, a retired Navy captain who met Mr. Francis in 2005.
The case first received news media attention, focused mainly on the salaciousness of the charges, after the Navy lured Mr. Francis, 49, and an associate to a meeting in San Diego, where they were arrested in September. Mr. Francis was detained on bribery conspiracy charges as federal agents also arrested Cmdr. Michael Misiewicz, who had scheduled port stops for warships in the Pacific, and John B. Beliveau II, a naval investigator accused of warning Mr. Francis about the inquiry. Another commander, Jose Luis Sanchez, who oversaw supply contracts, was arrested this month.
The three Navy officials were charged with conspiracy to commit bribery, accused of accepting Asian trips, the services of prostitutes and other gifts, which varied from “The Lion King” and Lady Gaga tickets to $100,000 in cash. Commander Misiewicz and Mr. Beliveau have pleaded not guilty, as have Mr. Francis and his associate. Mr. Francis’ lawyer, Pat Swan, declined to comment on the case. A hearing is scheduled for Thursday in San Diego on Mr. Francis’ request for bail. Commander Sanchez’s lawyer, Vincent J. Ward, said, “We are confident Commander Sanchez isn’t the person the government has portrayed him to be, and we look forward to defending him.”
The breadth of the case became clearer on Nov. 8, when the Navy placed two high-level officials, Vice Adm. Ted N. Branch, the director of naval intelligence, and Rear Adm. Bruce Loveless, the director of intelligence operations, on leave while it investigated allegations that they took gifts from Mr. Francis before becoming admirals. The questions about Admiral Branch date to his command of an aircraft carrier, the Nimitz, from 2004 to 2007, officials said.
A sixth officer, Capt. Daniel Dusek, has been relieved of command of an assault ship because of ties to Mr. Francis, the Navy said. The admirals and Captain Dusek declined through the Navy to comment.
Mr. Francis’ grandfather started the ship-service business in 1946, and his father expanded it. Mr. Francis skipped college to work for his father, and before long, he was earning enough to indulge in a love of fancy cars and jewelry, said San Markan Ganapathy, a Malaysian lawyer.
Mr. Francis spent time in jail in his early 20s on handgun charges, said Mr. Ganapathy, who represented him in the case. But before long, Mr. Francis was running his father’s company, supplying Navy ships involved in international military exercises. As the demand for security barriers and patrol boats increased after the 2001 terrorist attacks, he won contracts with the Navy one port at a time, and bought enough equipment to handle most of the Navy’s needs.
Though generally engaging, Mr. Francis could be a tough and demanding negotiator. After one commander complained that his security fees were too high for a Navy hospital ship on a humanitarian mission in Cambodia in 2010, for instance, Mr. Francis fired off an angry protest to an admiral.
Court documents also say that in March 2011, as the Blue Ridge, the command ship of the United States Seventh Fleet, sailed into Port Klang, Malaysia, with the fleet commander on board, Mr. Francis’ company refused to let it dock unless it promised to pay fees to a terminal that Mr. Francis owned.
Three months after the Blue Ridge incident, the Navy, in an effort to save money, completed a reorganization of its supply contracts into three large regions for the Pacific and one for the Indian Ocean. Mr. Francis won the bidding for all of the Pacific regions, though he lost out on the smaller contract for the Indian Ocean, where he had little experience.
A rival, the DaeKee Global Company, protested Mr. Francis’ victory for work in Japan, Korea and Russia. Documents in those files show how much lower he was willing to bid than his competitors to scoop up contracts.
DaeKee, a South Korean company, bid $67.9 million, while Mr. Francis offered to do the work for $21.6 million, less than one-third of DaeKee’s price. “That type of huge price discrepancy is certainly a red flag,” said Robert A. Burton, a former acting administrator of the Office of Federal Procurement Policy, the government’s top contracting office. “Contracting officers should have been raising questions.”
Contracts in hand, Mr. Francis turned to his friends inside the Navy to help him, federal investigators and documents say. The documents portray Mr. Francis as carefully cultivating Commander Misiewicz for nearly a year before recruiting him to secretly assist Glenn Marine.
In one email, Mr. Francis asked Glenn Marine’s manager in Japan, who had served as a Navy officer, how Commander Misiewicz was “looking long range.”
In that email, Mr. Francis said of the commander, “Mike has to be hungry and proactive” in advancing the company’s profits. “We gotta get him hooked on something?” he added. They went on to discuss arranging a trip for the commander to visit prostitutes. Soon Mr. Francis persuaded the commander to push the Seventh Fleet to send more ships, especially aircraft carriers, to ports in Malaysia and Thailand instead of Hong Kong and Singapore, court documents say.
Mr. Francis referred to docks in Malaysia and Thailand as “Pearl Ports” because he controlled more operations and could charge higher prices with less oversight, investigators say.
When carriers and other ships docked at those ports, the documents say, Glenn Marine executives, including a second former United States Navy officer, fabricated hundreds of higher bids from fictitious competitors to justify keeping the work for themselves, at inflated prices. The company also overbilled the Navy by millions of dollars for fuel, investigators say.
The court documents describe Commander Sanchez, who held three influential jobs in the Navy’s supply operations in the Pacific from 2008 until last April, as alerting Mr. Francis to complaints about his prices.
In February 2011, for instance, Mr. Sanchez sent an email to Mr. Francis that included Navy talking points to help him in a coming meeting with an admiral who wanted to reduce port-visit costs.
When the Navy finally seemed to have caught on to the high prices in September 2012, Commander Misiewicz came to Mr. Francis’ defense again, saying in an email to other Navy officials that “I’m in disbelief” that they would consider shifting a carrier away from one of Mr. Francis’ prized ports in Malaysia.
The carrier indeed docked at the port Mr. Francis wanted, and his charges were double what was expected, investigators say.
But portions of the document appear to indicate that, whether by formal agreement or simply longstanding practice, both Britain and the United States believed that in extraordinary circumstances, one country might feel compelled to spy on citizens of the other.
In a reference to an intelligence-sharing compact struck in March 1946, the memo said the two nations had agreed “that both governments will not target each other’s citizens/persons.”
That agreement, however, came with a caveat that “when it is in the best interest of each nation,” unilateral spying by one nation on the other could take place, the memo says. It goes on to expand that mandate to allow spying by the United States on any of the Five Eyes countries.
The memo was provided by Mr. Snowden to The Guardian, which shared it with The New York Times. The N.S.A. also declined to say whether the memorandum merely codified longstanding American practice or was breaking new ground.
“NSA works with a number of partners and allies in meeting its foreign-intelligence mission goals, and in every case those operations comply with U.S. law and with the applicable laws under which those partners and allies operate,” the agency said in a written reply to questions.
One former senior intelligence official said he had been unaware there were any exceptions to the policy of the five nations sharing intelligence information with each other, but said he would be surprised if the United States chose to spy on its closest allies very frequently.
“They would do this unilaterally so rarely and in such extraordinary circumstances because they would be so concerned about hurting the relationship,” said the former official, who spoke only on condition of anonymity. “My bet is that they wouldn’t go to that well very often.”
The memo contains several protocols on who should be alerted, and under what circumstances, when spying must take place on other Five Eyes countries — also referred to as “Second Party” countries.
One paragraph, marked secret, appears to suggest that the preferred option is to gain permission from the country whose citizens are to be spied upon. But the very next paragraph, marked secret and NOFORN, indicates that the N.S.A. can go it alone if permission is not forthcoming — or if United States chooses not to ask.
“When sharing the planned targeting information with a Second Party would be contrary to U.S. interests, or when the Second Party declines a collaboration proposal, the proposed targeting must be presented to the Signals Intelligence Director for approval with justification for the criticality of the proposed collection,” the passage explains.
It goes on to say that if that spying is approved, the information it gleans “must be maintained in NOFORN channels” — i.e., never shared with the spied-upon country.
A footnote goes further, suggesting that if a Five Eyes citizen is outside of his or her own country, the limits are lifted. In that case, the memo says, “there may be no restrictions associated with that collection” outside of basic N.S.A. rules on avoiding spying on innocent Americans and similar guidelines.
The memo does not detail how much, if at all, these orders differ from existing practice among the spying partners. Even the memo’s purpose is classified secret and NOFORN: “This management directive establishes United States Signals Intelligence System (USSS) policy and procedures related to the targeting of Second Party Persons.”
From the start, the document raises the intriguing question of whether American and British spy agencies have been loosening the rules established in the nonspying compact of 1946. After referring to the compact, the memo contains a passage stating that “this agreement has evolved” to include the understanding that Britain and the United States would not spy on each other.
But in the next two sentences, the memo asserts that the countries “reserved the right” to spy on each other “when it is in the best interest of each nation.”